Malaysia Fixed Income Outlook 2024

Quick recap of 2023

Malaysia fixed income has continued to deliver positive returns in 2023

After suffering from a bad year (2022) for bonds, the major fixed income markets have rebounded from the meltdown and started the year on a positive note. Particularly, we see the Malaysia-centric bond continuing its positive streak and resiliency with the S&P Malaysia Bond Index registering a modest 5.4% YTD return. The return prevails over other peer indexes like the Bloomberg Asia USD Investment Grade Bond Index at 4.9% and Bloomberg Global Aggregate Index at 2.2% while coming short to the top performer, Bloomberg Global High Yield Index at 10.2%. The stellar return from global high yield bonds is fueled by the substantial credit compression as markets aggressively price in a soft landing.   

Chart 1: Bond index return (in YTD basis)

Domestic fixed income market is dominated by local players

The domestic fixed income market is dominated by the local players, with 75% of the government debt participants being local investors while the remaining 25% being foreign investors. Still, the Malaysian bond market has one of the highest foreign investors’ participation rate in Asia, surpassing other more markets like Korea, China and Japan. This is partly due to the fact that Malaysia is one of the largest sukuk markets with 40 percent of global outstanding sukuk, ahead of Indonesia, Saudi Arabia and UAE.

Table 1: Resident and foreign holdings in outstanding Malaysia government securities

Chart 2: Foreign participation rate (% of total) in Asian government bond

MYR issuance remained largely stable in spite of OPR hike

MYR issuance volume in 2023 has remained more or less stable despite the hike in OPR rate to pre-pandemic level. We are not seeing governments or even corporations hitting the brake on bond issuance in the face of higher financing cost.

Chart 3: MYR issuance by monthly basis

MGS on a downward shift

MGS yield curve in large has fallen as opposed to 1 month and 3 months ago as a result of declining inflation number and consequently the lower prospect of OPR hike. We see the 10Y MGS yield has declined by 13bps to 3.75%. Notably, the longer duration 10Y MGS is now returning a slightly lower yield than the 7Y MGS, which we opine is the result of investors betting on longer duration bonds in the view of interest rates peaking.

Unlike many countries with either a flat curve or inverted curve, MGS curve offers reasonable steepness that makes extending duration sensible for investors.

Chart 4: MGS yield curve movement

Chart 5: Malaysia sovereign curve in comparison to other countries

Expect a higher inflation number in 2024 following subsidy rationalisation program and higher service tax rate

BNM set off its hiking cycle since May 2022 in the hope to tame inflation and the policy has been constructive so far. We see the consumer price index (CPI) has moderated from the high of 4.7% in Aug 2022 and has trend downward ever since.

The latest October 2023 CPI figure also shown that CPI has further eased to 1.8% y-o-y, as a result of lower increase in food and nonalcoholic beverages and higher base last year. Core inflation, which excludes volatile items has fell to 2.4% y-o-y.

Moving forward, we envisage a higher inflation number in 2024 following the subsidy rationalisation program expected to be realised in phases in 2024 as well as the indirect effect of higher service tax (from 6% to 8%, not include services like food, beverages and telecommunications).

Taking into consideration of the upcoming changes, the Ministry of Finance (MoF) is expecting the inflation rate to range between 2.1% and 3.6% for 2024. We think the inflation number will be around the upper bound of the estimation by the MoF, but not to the point of necessitating a change in OPR as the intention of subsidy rationalization plan is to reduce subsidies on the rich while keeping the inflationary pressure of lower to middle-income group in check.

Chart 6: Headline CPI and core CPI

Expect OPR to stay put at 3% through 2024

We opine that BNM will hold OPR at 3% in 2024. This is because at the current juncture, we do not see any market data that warrants a resumed rate hike. Particularly, the dipping inflation number renders lesser motive for BNM to hike overnight policy rate (OPR) further. On the flip side, we also think a slash in OPR rate is unlikely, so as to support MYR stability against hard currencies like the USD, GBP, EUR and others.

Also, the magnitude of interest rate hike by BNM has been mild in comparison to other developed countries. Taking the United States as an illustration, the FED has undertaken a cumulative 525 basis points hike coming out from its ultra-low interest rate environment while Malaysia has only raised a total of 125 basis points as of date. That’s a discrepancy of 300 basis points between the two countries.

The wide interest rate differential between Malaysia and the US that resulted in significant currency gap does imply that BNM is more inclined to keep interest rate unchanged in spite of other countries’ future rate decision (if the FED decides to cut rate in 2024). That would help in narrowing MYR currency gap with other countries. We think that it is in BNM play card to not cut rate in the early stages of rate cut by other countries.

Chart 7: OPR vs FED funds rate

Government’s target in improving fiscal deficit to benefit the fixed income market

The government has plan to improve the fiscal deficit through paring down expenditures and implementing new taxes. The reduction in fiscal deficit of a country can have positive implications for its credit rating as the government would be deemed to exercise prudency in managing its monetary policy. This would thus enhance global investors’ confidence.

When global investors perceive that a country is managing its fiscal affairs well, they are more likely to invest in its bonds. The increased investor confidence would then contribute to the overall economic stability.

Chart 8: Fiscal deficit to GDP ratio

A resilient bond space with fairly low default rates since 2012

A merit of MYR fixed income universe that shouldn’t be overlook is its resiliency. This is demonstrated in table 2 where S&P Malaysia bond index managed to stay in positive territory in 2022 when its global peers registered a double-digit negative return at the hand of high inflation and rising yields. The same also transpired in 2013.

On top of that, we have seen for the past decade a fairly low default rate within the MYR fixed income space. This is despite of the change in Malaysia government for the first time in 2018, coronavirus pandemic in 2019, FED rate hike, among others.

Thus, we think the addition of MYR high quality bond/ bond fund can provide the much-needed resiliency and stability in an investor portfolio.

Table 2: S&P Malaysia Bond Index against other peer indexes 

Prefer corporate bond with medium tenor (around 5 to 7 years)

We find the sweet spot in MYR bond space to be in the medium tenor (preferably between 5 to 7 years) to take advantage of the higher yields in the longer end. In particular, we take a liking in corporate bond as there is a notable spread against the Malaysia government securities (difference of 40 basis points between MGS 5Y and Corporate AAA 5Y). 

Also, we recommend going for the lower end of the investment grade (A1, A2) due to their substantial spread over the risk-free rate and the wide spread over the higher notch AA2 rating bond. 

We compiled a list of bond ideas that conform with the above proposition in table 3 while also included other interesting MYR-denominated bond ideas in table 4 below.

Table 3: MYR-denominated bond ideas (A1, A2 rated bonds with duration around 5 to 7 years)

Table 4: Other interesting MYR-denominated bond ideas

Table 8: Recommended AUD bonds 

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For more dynamic insights, join our live webinar on 17 January 2024, at 7 pm. During this session, we will extend our analysis beyond the MYR bond outlook, encompassing discussions on the USD and SGD bond landscapes, alongside an exploration of the broader macroeconomic environment. Don't miss this opportunity to gain a better understanding of the evolving fixed income environment — register now to secure your spot: https://bit.ly/2024-bond-outlook-webinar.

For specific disclosure, at the time of publication of this report, IFPL (via its connected and associated entities) holds positions in CENESE 5.300% 23Dec2026 Corp (MYR), DRBHMK 4.850% 04Aug2028 Corp (MYR), DRBHMK 5.570% 26Apr2030 Corp (MYR), DRBHMK 5.100% 12Dec2029 Corp (MYR), MCISIB 5.300% 29Dec2031 Corp (MYR), MYEGMK 5.400% 21Aug2026 Corp (MYR), MYEGMK 5.850% 19Nov2027 Corp (MYR), FIRTSP 3.250% 07Apr2027 Corp (SGD), FIRTSP 5.680% Perpetual Corp (SGD) and LLOYDS 7.086% 31Aug2033 Corp (AUD). The analyst who produced this report holds a position in DRBHMK 5.100% 12Dec2029 Corp (MYR).